Fed makes biggest temporary injection since '01

NEW YORK (Reuters) - The Federal Reserve on Thursday pumped its biggest temporary daily infusion into the U.S. banking system since just after the September 11, 2001 attacks as short-term lending rates rose on both sides of the Atlantic.

Even though some news about bank write-downs from riskier investments was not as dismal as some investors had feared, underlying strains pushed overnight lending rates up in both the United States and Europe.

"There was a bit more focus on the Fed operations today in context of the rise in Libor (London Interbank Offered Rates)," said Tony Crescenzi, chief bond market strategist at Miller, Tabak & Co. in New York.

Two-month sterling rates hit a two-month high, which also put upward pressure on the U.S. money market.

In addition, U.S. commercial paper outstanding shrank for the second consecutive week, indicating dislocations from the summer's credit market turmoil continue to dog that sector.

The Fed injected $47.25 billion in temporary reserves, its biggest combined daily infusion since September 19, 2001, to calm a rise in overnight interbank lending rates.

"We are seeing tightness in fed funds with concerns about financial institutions' exposure to subprime," said Kenneth Kim, economist with Stone & McCarthy Research Associates, in Princeton, New Jersey.

"So long as the Fed's actions are adequate in getting fed funds back to target in short order within the next day or so, I don't see any prolonged problems," Kim added.

MORTGAGE TROUBLES

Red ink continued to spill from subprime mortgage securities tied to the sagging U.S. housing market.

Finance company GMAC's Residential Capital home mortgage unit may be close to violating certain debt covenants due to a plunge in its net worth, the Wall Street Journal reported in its online edition on Thursday.

General Electric Co (NYSE: - ) said on Wednesday its short-term bond fund ran into trouble amid losses on asset-backed securities and that all its outside investors have liquidated their holdings.

The size of the U.S. asset-backed commercial paper market contracted for a 14th straight week, as the aftermath of the summer's credit market upheaval continued to erode this sector of the short-term loan market, Federal Reserve data showed on Thursday.

The overall U.S. commercial paper sector shrank to $1.862 trillion in the week ended November 14, down $3.6 billion from a week earlier.

Top banks, including Citigroup (NYSE: - ), Merrill Lynch (NYSE: - ) and UBS (VTX: - ), have announced colossal losses and write-downs in the past month.

On Thursday, Barclays (LSE: - ) revealed less damage than feared from the U.S. subprime mortgage meltdown and UBS sought to dampen talk of more hefty losses,

Barclays, Britain's third-biggest bank, said its investment banking unit took a 1.3 billion pound ($2.7 billion) write-down due to the credit market problems of the past four months -- far less than many estimates.

Swiss banking giant UBS (VTX: - ) moved to douse speculation it would book fourth-quarter write-downs in the order of $8 billion. It suffered its first quarterly loss in five years last month after writing down 4.4 billion Swiss francs of subprime-linked exposures.

MARKET TIGHTNESS

Tighter money markets signaled continuing credit stress.

Interbank sterling money market rates jumped as banks showed an extra willingness to pay a premium for liquidity to ensure adequate funding over the upcoming holiday period.

In the United States, federal funds traded at 4.81 percent early in the session, well above the 4.50 percent target rate the Fed sets.

But fed funds fell to 4.69 percent by early afternoon in the aftermath of the Fed's three repo operations.

The central bank's daily open market operations are intended to bring the rate at which federal funds trade in the market close to the Fed's target rate. Fed funds are the interbank market for U.S. overnight money.

Some saw the Fed's big fund injection as largely attributable to rollovers of maturing operations. Rollovers accounted for $40.5 billion of the $47.25 billion injected into the banking system on Thursday.

As such, the system increased by a net $6.75 billion, as the central bank added more liquidity to stem a rise in the federal funds rate.

(Additional reporting by Tamawa Kadoya and Justin Grant in New York and Mike Peacock in London; Editing by Dan Grebler)